Investing.com — Deutsche Bank flagged a growing set of risks that could drive inflation higher in the coming months.
While inflation has retreated in many economies, the bank argues that now is not the time to become complacent. Recent developments such as faster-than-expected central bank easing, rising commodity prices, and persistent inflationary pressures point to the possibility of higher inflation ahead.
This has already been reflected in the markets, with the US 5-year inflation swap posting its largest rise since early 2023 and United States 10-Year yields climbing more than 50 basis points in just a few weeks.
In a note released Monday, Deutsche Bank outlined five key reasons why inflation risks are still rising.
1) Faster-than-expected monetary easing: Deutsche Bank highlights that major central banks, including the Federal Reserve and the European Central Bank (ECB), have been more aggressive in easing monetary policy than expected.
The Fed, for instance, cut rates by 50 basis points in September, and the ECB is expected to follow suit in October.
“Although these decisions are understandable in the context of lower headline inflation, historical experience says that this is precisely the time to be cautious on inflation, given policy is becoming less restrictive.”
2) Geopolitical tensions driving commodity prices higher: The recent uptick in commodity prices, driven by the geopolitical crisis in the Middle East and China’s economic stimulus, has also contributed to mounting inflation risks.
Brent crude prices, for example, surged after renewed missile attacks between Iran and Israel, while China’s stimulus measures have boosted the prices of industrial metals like copper.
As a result, “this uptick in commodity prices has taken away a source of disinflationary pressure that had been in place over the summer,” Deutsche Bank notes.
3) Stronger-than-expected US economic data: Contrary to fears of a slowdown, recent US economic data has been stronger than anticipated. Nonfarm payrolls jumped by 254,000 in September, while GDP growth is projected at 3.2% for Q3.
“Much as the stronger news on growth is welcome, it also means that economic demand and inflation is likely to be stronger than it would otherwise have been,” Deutsche Bank’s team cautions.
4) Persistent core inflation pressures: Last week’s US CPI report showed that core inflation was running at its fastest pace in six months, rising by 0.31%.
More troubling is the rise in the “sticky” categories of inflation, which Deutsche strategists point out could lead to inflation staying higher for longer.
For example, the Atlanta Fed’s ‘sticky CPI’ measure saw a 0.32% gain, the sharpest in five months.
5) Rising money supply growth: Lastly, money supply growth has also picked up recently, with M2 in the US growing by 2% year-on-year in August, the highest rate since September 2022.
In the Euro Area, M3 money supply growth hit 2.9%, the highest since January 2023.
“Although money supply growth is not the only determinant of inflation and it is rising from a low level, we saw in the post-pandemic period that it was a strong leading indicator that offered an advance signal that inflation could move higher again,” strategists said.
In sum, even though inflation has eased to target levels or below in some regions, the recent shift toward monetary easing means investors should stay vigilant, Deutsche Bank said in the note.
Geopolitical tensions and rising commodity prices could push inflation higher again. Over the past six weeks, growing concerns among investors highlighted the increasing risk of inflation, which could have significant market implications if it resurfaces.